2018 was a tough year for contractors, freelancers, consultants and the self-employed.
After IR35 reforms decimated contracting in the public sector, it was announced in Chancellor Philip Hammond’s Autumn Budget 2018 that the changes would be extended to the private sector from April 2020. You can read the full budget statement here.
These reforms are set to affect thousands of private sector contractors across the country, but what can you do to prepare?
What is IR35?
The term IR35 is an abbreviation of ‘intermediaries legislation’. This is a set of tax rules that apply to those that work via an intermediary to provide the end client with a service – a limited company or personal service company (PSC) are the most common instances.
This legislation was conceived in 2000 and its core aim is to remove any tax advantages of providing services via these intermediary limited or public service companies.
Let’s bring back a well-used example:
An engineer is contracted by CarCo. He is hired and paid through his own limited company. This limited company is the intermediary between him and CarCo, the client, and means that he isn’t providing his services directly. He doesn’t have an employment contract and is therefore exempt from paying National Insurance tax, but doesn’t receive holiday or sick pay and must supply his own tools. This tax relief allows him to set aside enough money to pay for his overheads.
IR35 rules specifically target those contractors that HMRC consider to be more akin to traditional employees in working practice. For example, if the engineer was required to start work at a certain time and had to wear a uniform while on-site, he would be classed as a so-called 'disguised employee'.
Why has IR35 been reformed now?
IR35 rules have been amended almost continuously over the years, with successive governments maintaining that too many limited company owners are still illegitimate in their tax relief. This accumulative pressure lead to new ‘off payroll’ rules to be implemented in the public sector in April 2017.
Under these new rules, contractors themselves are no longer responsible for determining their IR35 status - the authority is instead handed to the client. Should the contractor be found inside IR35, the client is obligated to deduct National Insurance and income tax from the contactor’s pay, as well as make employers’ NI contributions.
This flawed system has already jeopardised many contractors' livelihoods. The CEST tool supplied by HMRC to make determinations with has been widely criticised and many clients – including the NHS – have opted to blanket determine contractors as inside IR35 to avoid penalties.
It's also worth adding that the Treasury expects to net £1.3bn per year by 2023 thanks to these reforms - no small fee by any means.
What should contractors in the private sector do to prepare for IR35?
While the contracting industry as a whole has taken a legislative battering over the years, it’s proved hardy; even in 1999 when IR35 was first mentioned, it was proclaimed as the end of contracting. Of course, it’s still very much thriving 20 years on.
Given that the new rules have already been pushed back a full year thanks to complications and outcry, it bodes well that there is time yet to achieve fairer terms. While you should definitely not despair, there are still steps that can be taken while events unfold.
Both the CIOT and FCSA have warned against abandoning existing limited companies in favour of other dubious, non-compliant arrangements. This advice sits particularly heavy on the lower-paid end of the contracting spectrum, where many workers don’t necessarily have much choice in their business structure. It's an unfortunate reality that HMRC will still pursue whatever tax they deem to be owed, and they’re much more likely to go after individuals – with interest added. No matter how tempting, it’s of utmost importance that you resist any tax relief schemes, even if they’re actively encouraged by a client or professional.
It’s also advisable that you seek out a professional contract review while you’re still responsible, as a contractor, for your own IR35 status determination. Consider also taking out IR35 tax investigation insurance, which covers the extensive court costs that could arise from an HMRC case as well as representation by a tax specialist at a tribunal.
What happens if I’m found inside IR35?
If you fail an IR35 test, you can expect to pay around 25% more in tax every year, which would amount to a substantial amount of money missing every month. You also still wouldn’t benefit from employment rights or have a contract of employment with your client, so you could face critical financial issues with no real benefits or protections to speak of. It’s important to take the necessary precautions to avoid this situation.
Read more about preparing for IR35 here.
For any further information or advice, please call us on 01163 800 400 or email [email protected].